WHY DO EARNINGS DIFFER?
Even individuals in same occupation, or even in the same family, with the same education may have different earnings. Average earning differential between brothers was $25,000 vs. $27,000 for two men paired randomly, indicating that pay differentials are almost as great within a family as in the general population.
What do economists have to say about Earnings Differentials? We can use material from Chapter 12 - Supply and Demand for Resources. We start with this:
Earnings of all workers would be exactly equal IF:
1) All workers were homogeneous and equally productive
2) All jobs were equally attractive
3) Workers were perfectly mobile, could move instantly to a new job opening.
If wages were temporarily higher in any occupation or any area of the country, workers would be attracted to those occupations or regions, and the increased supply would put downward pressure on wages. Same thing in reverse if wages were low in one area - decrease supply, higher wages. In both cases, wage differentials would be eliminated by competition in labor markets.
Since we observe earning differentials, it has to be related
to the fact that:
1) Workers are NOT homogeneous, not equally productive
2) All jobs are NOT equally attractive
3) Workers are NOT perfectly mobile.
EARNINGS DIFFERENTIALS FROM NONHOMOGENEOUS LABOR
Productivity differences among workers are reflected in wage differences. Productive workers have a higher MRP, which is reflected in higher wages. Higher wages give workers the incentive to invest in human capital. If not, there would be little incentive to acquire skills and training.
See page 339. a) The D for Skilled workers is > the D for Unskilled. b) The S of Skilled workers is < S of Unskilled, leading to c) higher wages for skilled vs unskilled. See page 311. Avg earnings for college degree vs HS: $52k v $30k. The $22k differential is due to higher productivity from investment in human capital.
Ceterius paribus, higher skill = higher pay. But there has to be demand, e.g. skilled blacksmith won't make very much because demand is so low. Why do professional athletes make more in basketball vs soccer?
All jobs are not equally attractive to all people, leading to wage differences. And all workers are not equally motivated. Some people value lots of money, others value lots of leisure time. Ceterius paribus, those more highly motivated by money will invest more time, effort and resources to achieve that goal. Economists don't make value judgements about worker preferences, they just observe differences and acknowledge that worker preferences contribute to wage differences.
Also, workers consider "Non-pecuniary Job Characteristics"
- working conditions, safety, clothing requirements, location, prestige,
pressure, flexibility, benefits, holiday time, employee discounts, etc.
Non-wage factors of a job. Workers are willing to accept lower money
wages if the non-money factors are attractive, e.g. college professors.
Workers demand higher money wages when the non-money factors are unattractive,
e.g. unsafe jobs like coal mining, washing windows 50 stories up, sewer
workers, etc. Wage differences due to non-money factors are
called "compensating wage differentials."
RACE AND GENDER DISCRIMINATION
Employment discrimination based on race, religion, gender, etc. contributes to wage differences. Wage differences can also be based not on employment discrimination, but on discrimination that limits women or minority groups from getting education, skills and training that leads to higher wages. Discrimination is not in the labor market, but in the market for educational opportunities.
Also, discrimination doesnt always result in lower wages, it can be associated with higher wages: Chinese in Malayasia. Economics of discrimination, next section.
Workers are not perfectly mobile, which can lead to earnings differentials. Example: Demand goes up for computer programmers because of Y2K. Supply in the SR is inelastic, so wages rise sharply, leading to earnings differential. In the LR, the earnings differential between computer programmers and other workers will narrow.
Labor immobility might cause geographic earnings differentials within a profession . Example: demand for carpenters rises in CA due to housing boom, putting upward pressure on wages. Given time, some (not all) carpenters will move to CA, but there could be persistent earnings differentials for carpenters between CA and MI.
Why do areas with higher home ownership rates have higher average unemployment rates?
Institutional Barriers can also contribute to labor immobility (rigidities) - min wage laws, unions, occupational licensing (medicine, taxis, barbers), which contribute to earnings differentials.
How do workers compete against?
See page 343 for a summary.
ECONOMICS OF DISCRIMINATION
What do economists have to say about discrimination in the labor market against women or minorities?
How To Measure Labor-Market Discrimination?
How much does discrimination contribute to earnings differentials? In political debate, statistics are often presented indicating the differences between group averages: Women make 26% less than men, on average. Blacks make 20% less than whites on average. Problem: even in a labor market free from discrimination, earnings differentials will exist, so we have to try to isolate the independent effects of discrimination from all the other factors that contribute to earnings differntials.
Example: Human Capital and education differences exist which contribute to earnings differentials. 80% of white male workers have HS diploma and 25% have college degree vs. 67% for black male workers and 12% and 19% of white women have college degrees. Point: some of the earnings differentials between B/W and M/F are due to education, not necessarily labor-market discrimination.
Other issues: quality of education is also important in addition to the number of years in school. Public schools in predominantly black areas have generally been of lower quality than predominantly white areas. Also, girls were traditionally directed away from science and math courses, even though these technical subjects have greater value in the market place. Even we could measure quality as well as quantity of education, the differences among B/W and M/F would be even greater. See page 349
Another factor: Job experience (or age) and its effect on earnings. Female LFPR (labor force participation rate) has increased significantly leading to a lower average age for women in the work force compared to men. Some of the M/F differential can be explained by the fact that men on average have more work experience than women on average. What else contributes to work experience differences between men and women?
Another factor: Compensating differentials?? Some labor economists have suggested that women (on average) take jobs that are more pleasant compared to men - women have a higher preference for pleasant working conditions vs men? Women prefer lower paying pleasant, non-strenuous, indoor work in offices with regular hours over higher paying outdoor work that is dirty, strenuous, physically demanding with long hours? Secretarial work preferred over long-distance truck driving, moving furniture, working as a lumberjack, garbage hauler, outdoor construction roadbuilding work, etc. Cleaning houses vs cleaning windows on a skyscraper??
Economists agree that some of the observed earnings differentials are due to discrimination, but there is no consensus on how much. Controversial. Agreement on this: Because the differences in AVERAGE wages reflect differences in human capital, worker preferences, job characteristics, job experience, age, hours worked, productivity, etc. they do NOT by themselves say anything about how much discrimination exists in the labor market.
Employer discrimination exists when employers prefer one group over another (W over B, or M over F), which is reflected in a higher (lower) demand for the favored (unfavored) group and a higher (lower) wage. See page 344. If one group of workers receives lower wages than another group, who is to blame??? Easy answer: Employers. Economists are skeptical of this answer. Reason: they believe that competitive markets provide a natural antidote to discrimination. What is it???
For a profit-seeking employer, discrimination is costly, raises labor costs significantly, lowers profits, and puts that firm at a competitive disadvantage. If a profit-maximizing firm can hire equally productive blacks or women for 25% less than for whites or men, there is a strong profit motive to do so - they can lower labor costs by 25%. Business owners that only care about making money will not discriminate will be able to earn positive economic profits, have a competitive advantage and make more money than firms that do discriminate. Competitive markets have a natural remedy (antidote) for employment discrimination.
Remember: Profit margins are thin, 2-5% in most industries, page 138.
Case Study: Segregated Street cars and the profit motive. Early 20th century, streetcars in many southern cities were segregated by race. Segregation was the result of laws adapted by various cities or states. What response would you expect from streetcar companies?? What was their motive??
"Officials of the company may or may not have disliked blacks, but they were not willing to forgo the profits necessary to indulge such prejudice."
General lesson: Business owners are usually more interested in making profits than in discriminating against a certain group, e.g. baseball.
How to Detect Discrimination? To isolate
the independent effects of discrimination on earnings differentials, we
1) adjust for differences in education, experience, other productivity-related factors and then
2) compare equally qualified groups who differ only with regard to race or gender.
Example: Salaries of single men vs. single women, aged 25-35, who have never been married, have no children, with BA degrees from UM-F in accounting with GPA > 3.5, with 5-10 years continuous work experience in public accounting, working in SE Michigan, with CPAs.
Or same as above, but compare white workers (M and F) vs black workers (M and F). For example, among people 27-33 years old who have never had a child, the earnings of women make 98% of what men make (WSJ) vs. 74% overall average. See page 347. Overall, for all age groups, single women make 92% of Men, see page 348.
See page 346 for a table of "productivity-adjusted" wages of minorities and whites. Shows how wages would compare if the two groups had the same productivity characteristics (education, work experience, marital status, union membership, regional location, number hours worked, etc.).
Example: Mexican-American men vs white men. Unadjusted difference: Mexican-American men make 67% of white men, ON AVERAGE. Adjusted difference: Mexican-American men make 92% of white men, suggesting that of the 33 percentage point difference (100%-67%), 25 percentage points are due to factors like education, experience, regional location, etc. After adjusting for factors other than discrimination that contribute to earnings differences, Mexican- American men make 92% of white men.
For women, especially Mexican-American women, adjusted differences are much smaller than the unadjusted differences. For Asian women, they make more on average (106%) than white women, but adjusted they make only 97%. Why??
Marital Status - Marital status affects women and men differently. Affect on men's earnings? Affect on women's earnings? See page 348.
Traditionally, although less so today, married men and
women have different areas of specialization within a family/household.
Men specialized in being the main (or sole) breadwinner, women specialized
in operating the household and raising children. Men were more likely
1) Have continuous, uninterrupted work experience
2) Move in order to get a higher paying job
3) Accept jobs with long hours, uncertain schedules, and travel
Women were more likely to:
1) Seek part-time employment
2) Have interruptions in their career
3) Seek jobs with flexible hours and less travel
4) Select careers where discontinuous work experience is not a handicap - teaching, nursing, secretarial, etc. - so that depreciation of human capital was not as much of an issue.
THE FUTURE, see page 349.
ECONOMICS OF FRINGE BENEFITS - See page 350. Fringe benefits have been increasing faster than wages. What are fringe benefits? Non-wage benefits such as......??? Employees are concerned with TOTAL COMPENSATION = Monetary wages + Non-Monetary Benefits. $17.08 per Hour = $12.14 (money) + $4.94 (benefits).
Why do employer's pay fringe benefits? Why not just raise the money wages???
MINIMUM WAGE LAWS?
See graph, page 359. If the monetary wage goes from $4/hour to $5.15/hour, several results will follow:
1) the Qd of labor will fall from E0 to E1.
2) the Qs of labor will rise. Where will the increase in Qs come from??
3) non-wage fringe benefits will fall as employers look for ways to cut back to offset the higher money wage. Like what???
4) discrimination will rise - there is now a surplus of workers for every job.
5) unemployment will rise
6) reduction in work opportunities - fewer unskilled workers will gain work experience. Predicament: It's hard to get a job without experience, but they cannot get experience without a job.
7) less on-the-job training. Example: I'll give an unskilled worker his/her first job starting at $4 and then give them on-the-job training (which is costly, takes time, effort), but if I have to pay $5.15 then I won't give on-the-job training. I'll either hire more experienced , older "unskilled" workers, or I'll hire unexperienced workers and just cut back on training to save money.
Estimated Impact? For a 10% increase in Min Wage, employment falls by 1-3%. 10,000 - 30,000 lost jobs per 1m unskilled workers.
Do Min Wage Laws help the poor? Common argument for raising min wage. "You can't support a family on the min wage - $10,000." Responses:
1) Remember that raising the min wage doesn't force employers to hire (or retain) workers, it just makes it illegal to pay them less than the minimum. So if you are trying to support a family and you lose your job, or can't find one, you surely won't be able to support a family on $0.00/hour.
2) Most min wage workers (88%) are NOT workers trying to support a family (only 12%). 31% of min wage workers are teenagers, 63% of min wage workers are part-time, more than 50% are members of a family with household income above the median. Typical min wage worker is a spouse or teenage member of a household with family income well above the poverty level. Raising min wage would not be a very effective way of helping the poor. There are other programs that would be much more effective for dealing with low income households.